Starting a Micro Business:

Everything You Need to Know

Micro business owners who don’t want to form a legal entity, like an LLC, can be sole proprietors. Why not keep operations simple, right? Sole proprietors pay tax on business income when they pay their personal taxes. However, suppose a sole proprietor doesn’t have a separate business account. In that case, juggling business and personal taxes can be tricky, and they might miss out on certain tax deductions if not fully aware. What’s the catch? Doing business as a sole proprietorship leaves owners unprotected in a way that forming a legal entity doesn’t. Entities, like LLCs or S Corps, give owners more protection for personal assets so they aren’t jeopardized during financial hardship or litigation.

LLC taxes are typically very simple and flexible for micro business owners. There’s a reason why more than 80 percent of small business owners choose an LLC when forming their business. LLCs are “pass-through” entities, meaning profits are “passed through” as income to owners or members, and business owners get to report LLC income on their personal tax returns. As far as asset protection, LLCs offer a hybrid structure that allows owners more control over their business and extra protection for personal assets in case of financial or legal issues because company assets are owned by the LLC and are separate from the owner’s personal assets.

Filing as an S Corporation could save micro business owners money. Meaning, like an LLC or sole proprietorship, profits pass through to shareholders, and income is taxed on the shareholders’ personal tax returns. This means the corporation’s profits are only taxed once, and shareholders avoid double taxation. S Corps also offer owners certain legal protections for personal assets, which are separate from the business’s assets. Shareholders aren’t personally liable for the company’s debts or liabilities, and creditors can’t go after the shareholders’ personal assets to recover business debts.

If a micro business is a C Corporation, the company pays C Corp tax rates on qualifying corporate profits. Then, post-tax income can be distributed to corporation shareholders as dividends. Shareholders are taxed on dividends, so owners pay taxes on the same earnings twice—once at the corporate level and then at an individual level. This is called “double taxation.” Since a C Corp is a separate legal entity, the business’s liabilities are separate from the liabilities of the directors, investors, and shareholders.